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Chapter 17: Q. 17.2 (page 374)

Describe an inverse relationship between inflation and unemployment.

Short Answer

Expert verified

Both unemployment and inflation Inflation is caused by an unexpected increase in aggregate demand, which results in a reduction in the unemployment rate.

Step by step solution

01

Step :1 Introduction  

In light of the stagflation that the Indian economy has been experiencing recently, the inverse link between inflation and unemployment is generally considered as validation of the theory that inflation helps the economy run at its maximum capacity."

02

Step :2 Explanation 

Unemployment and inflation Inflation is caused by an unexpected increase in aggregate demand, which results in a decrease in the unemployment rate. As a result, the inflation rate and the unemployment rate should be inversely related. The Philligs curve will shift outward if consumers expect efforts to exploit this Philigs curve trade off to enhance inflation.

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Most popular questions from this chapter

Suppose that the government altered the computation of the unemployment rate by including people in the military as part of the labor force.

aHow would this affect the actual unemployment rate?

b How would such a change affect estimates of the natural rate of unemployment?

c If this computational change were made, would it in any way affect the logic of the short-run and long-run Phillips curve analysis and its implications for policymaking? Why might the government wish to make such a change?

Take a look at panel (b) of Figure 17-4, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. Then the inflation rate increases to 3percent. Does reduced cyclical, frictional, or structural unemployment account for the resulting decrease in the unemployment rate at pointB ? Explain briefly.

Evaluate the following statement: "In an important sense, the term policy irrelevance proposition is misleading because even if the rational expectations hypothesis is valid, economic policy actions can have significant effects on real GDP and the unemployment rate."

Suppose that people who previously had held jobs become structurally unemployed due to establishment of new government regulations during a period in which the inflation rate remains unchanged. Would the result be a movement along or a shift of the short-run Phillips curve? Explain your reasoning.

Consider Figure 17-5, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. In the long run, will an increase in the inflation rate to 3percent result in the economy operating at point Bor at point F1? Explain your reasoning.
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